Peer-to-peer lending has disrupted the traditional banking model, exploiting the possibilities of modern technology to bring investors and borrowers together. Landbay is one of the peer-to-peer lending sector’s biggest players, and is also one of the few platforms to offer fully asset-backed investment options. As their name implies, Landbay is focused on real estate investment, and it facilitates borrowing and lending between individuals on fully assessed UK real estate.
Landbay has remained resilient throughout the recent UK housing crisis, and it offers a unique value proposition to both investors and borrowers. In this article, we’ll examine exactly what Landbay does and why it’s been so successful.
First off, we need to understand the sector in which Landbay operates - peer-to-peer lending, commonly abbreviated as “P2P”. This is an innovative form of lending that has only become possible with the advent of digital communications technology that can facilitate the large amount of contacts which must be maintained. The basic premise of P2P finance is that a loan, however large, needn’t necessarily be funded in one large chunk; it can easily be broken down into hundreds of smaller units, each of which can be supplied by a small investor. A loan of £100,000, for instance, can be divided into 1,000 loans of £100, which opens up the possibility of sourcing funds from sources outside of major lenders.
This idea is great in theory, but until recently the concept was unworkable. The administrative burden of tracking thousands of lenders for each individual loan was enormous, requiring the lending platform to keep records and track payments for millions of different loans. With the coming-of-age of digital technology, though, this task has been rendered much easier to accomplish. Computers can crunch the numbers for any amount of loans, providing instant feedback for every single lender involved in the P2P program.
Peer-to-peer lending is, at its heart, a very simple concept, enabled through the use of digital technology. The platforms which operate in this industry, such as Landbay, are essentially middlemen, and don’t make investments themselves; it’s their job to put investors in touch with borrowers. The platform is responsible for assessing which loan applications are approved, and Landbay thoroughly vets all applicants for its mortgage services.
For investors, P2P lending provides a stable and secure way to make an attractive return on investment. With interest rates at an all-time low, investors have few appealing options; banks are offering extremely low returns on their savings products, in many cases not even enough to keep up with inflation, and the only other option is to invest in the stock market. This can be profitable, but it’s also risky, and few investors are able to make this work for them. Peer-to-peer lending, then, fills a valuable gap in the market, allowing investors to take on a little more risk than a savings account but with much more potential for profit. Coupled with the new Innovative Finance ISA that allows savers to keep up to £20,000 in interest tax-free, it’s easy to see why P2P lending is the next big thing in the financial industry.
P2P lending is often seen as a halfway house between traditional banking and the stock market. It’s less risky than investing in the open market, but there is always the risk that a loan won’t be repaid; many lenders maintain a coverage fund to guarantee payments of bad debt, but if many borrowers default on their loans this may not be sufficient to cover them all.
P2P lending is also not covered by the Financial Services Compensation Scheme, which guarantees the first £85,000 of any money deposited with a bank. This is because peer-to-peer lending is investment, not saving, and so is perceived to have an inherent element of risk. In reality, most investors in P2P lending have found it secure and reliable - all loans are broken up into many small units, so even if a loan isn’t paid back each lender only stands to lose a small portion of their overall investment.
The P2P sector has grown substantially in the past 3 years, transforming into the “Cinderella of the financial sector”. Peer-to-peer lending has consistently outperformed mainstream banks, and many major lenders are now waking up to the possibilities offered by this innovative form of lending; the recent arrival of a P2P-specific ISA, the “Innovative Finance ISA”, has only served to cement that peer-to-peer lending is here to stay.
Peer-to-peer lending is an excellent way to supply financial support for any project, and the P2P industry has seen significant diversification in recent years. It’s now possible to secure many different types of loan through P2P platforms, and Landbay specialises in residential Buy-to-Let mortgages. Many homeowners picture mortgages as a bank-only loan product, but many homeowners have managed to secure affordable home loans through peer-to-peer lending, essentially borrowing from hundreds of different lenders to pay for their BTL property.
The advantages of borrowing from Landbay are numerous, mostly because the platform itself provides all the services of a bank whilst having much lower overheads. Because Landbay doesn’t have high operating costs, like a bank, they’re able to charge lower rates to borrowers whilst still providing a return for investors. In addition to this, Landbay sources its capital from independent lenders, rather than relying on loans from the Bank of England. This means that Landbay’s rates are not dictated by the Bank of England’s Base Rate, as the rates of high-street banks are; they are free to set their interest rates at a competitive level.
Mortgages are a great deal more complex than simple personal loans, and require a strong understanding of what constitutes a reasonable investment. The biggest difference between a personal loan and a mortgage is that a mortgage is asset-backed; it’s secured on the house itself, which means the lender can repossess and sell it if necessary. The lender has to be absolutely certain that they’re not over-valuing the house, because if the homeowner fails to repay they won’t be able to make their money back by selling the property.
It takes a lot of know-how and experience to offer mortgages, and Landbay has some of the best minds in the business on their staff. While Landbay themselves don’t actually offer loans in any capacity, it’s their job to complete the checks and valuations that ensure the property meets the necessary lending requirements. As with a more traditional mortgage application a full RICS survey is carried out for each new property, and Landbay’s lending criteria are stricter than the standard market requirements for BTL property loans. Once these checks are finished, Landbay lists the investment opportunity on their website, enabling interested lenders to contribute to the property’s mortgage.
Landbay focuses purely on offering buy-to-let residential mortgages, and doesn’t make any provisions for owner-occupied or commercial mortgages. While Landbay has made the decision not to offer commercial mortgages, they’re actually unable to offer mortgages for owner-occupied properties. This is because there are very strict regulations for any lender that offers mortgages for owner-occupied homes, setting out what terms are appropriate. The Financial Conduct Authority requires any lender that offers these mortgages to apply for “regulated” status, which is difficult to achieve.
This regulation exists to protect homeowners who aren’t investing in a property for profit; buyers who simply want to purchase a home of their own may not have a strong understanding of the potential pitfalls that can come with an inappropriate mortgage, so it’s important that certain limitations are put in place to guard unwary homeowners. However, investors in BTL property are assumed to have a much better understanding of the ins and outs of mortgage management, and aren’t in need of such protection. This allows investors to take advantage of a much wider range of mortgage products than they would otherwise be able to, and allows many lenders to provide buy-to-let mortgages.
Obtaining a mortgage from Landbay is achieved in a similar way to a standard mainstream mortgage application. Landbay has the same stringent criteria and valuation requirements as any major bank, and their team of expert underwriters will need to thoroughly assess each and every application before it’s approved. However, because Landbay is a highly specialised business operating in a restricted area of the market they’re able to offer a more focused service than high-street banks, which try to provide many different services.
Where Landbay differs from mainstream mortgage providers is in the way their mortgages are financed. Once a mortgage has been approved by the Landbay team, they will make it available to their investors - the property will be listed on their website along with all relevant details, and investors can then decide how much they’re willing to contribute to the loan. Not all investors want to pick and choose investments themselves, though, and some will have their accounts automatically diversified across a range of investments.
Once the loan has been fully funded it will be supplied to the property’s owner upon completion, as with a typical mortgage. From this point on there are no differences between a Landbay mortgage and a standard mainstream mortgage; from the homeowner’s point of view payments are made to the same schedule and regularity as if they were borrowing from a high street lender.
Landbay operates in a particularly competitive sector; the buy-to-let mortgage industry is burgeoning and has seen intense growth in the past few years. Because of this, Landbay must ensure that it’s offering top-of-the-range products, but must also be able to guarantee security to its investors. Landbay has achieved this by focusing on a small section of the market, identifying what its core products are and ensuring that these are of a market-leading quality.
While many mortgage providers offer dozens of different mortgage types, with many different variants of each mortgage, Landbay keeps it simple; there are two mortgage rates available, tracker and fixed, and these are available for a limited period of time.
A fixed rate mortgage maintains a steady interest rate for a certain period of time, typically between 1-5 years. This is good news for buyers, because it allows them to accurately predict their mortgage costs - their interest rates won’t fluctuate at all, and can be reliably budgeted. For mainstream banks this poses a problem, though, because they’re borrowing from the Bank of England at a set rate; if this rate increases while their interest revenue remains the same, they won’t be able to make a profit. Consequently, these banks have to set their fixed-rate mortgages well above the market rate to ensure they won’t lose money if rates rise significantly.
Landbay, of course, isn’t borrowing from the Bank of England, and so doesn’t stand to lose money if the base rate rises. However, it still needs to provide a good return on investment to lenders, which will be hard to do if interest rates rise. For instance, if they provide a fixed-rate loan at 3% this year, this could well represent an attractive investment for lenders. However, if interest rates rise quickly a 3% return on investment might quickly become unattractive; high street banks might start offering a more attractive rate, leaving Landbay with an unappealing investment option. Therefore, it’s in Landbay’s interests to set their fixed-rate mortgages above the market rate, so that they can still provide a rewarding product to their investors.
A tracker mortgage directly follows any fluctuations in the Bank of England base rate, and is set by the lender at a given level above this rate. Any rises or falls in the base rate are reflected in the interest rate of the mortgage, and while this means that borrowers can potentially face a higher interest rate if overall rates increase, they can also pay less if rates fall. This also guarantees that borrowers will always have a competitively-priced loan, since their interest rate is directly tied to the market-setting base rate.
Landbay is a highly professional lender and only offers loans to secure borrowers. There are many checks which potential borrowers have to pass in order to receive approval, and Landbay has stronger requirements than most other lenders in the UK buy-to-let mortgage market.
Landbay only lends on properties in England or Wales with a value in excess of £80,000. The property must also be in a suitable condition for habitation, which means that Landbay loans cannot be used for “turnaround” projects. It is possible to purchase a property in need of light refurbishment, generally modernisation, as long as this is to increase rental value and not to render the property livable.
All borrowers need to be aged over 21, with an income in excess of £30,000. This is more than many mainstream banks require, but recent changes to UK law mean that this salary threshold is likely to increase in the future. Landbay will lend to first-time landlords, but not to first-time buyers; their customers must have owned a property before to be eligible for a mortgage.
Landbay requires at least a 20% deposit for any property, and can supply mortgages of up to £500,000. This is very competitive by the standards of the buy-to-let mortgage market, where LTVs of 60-70% are more common. In addition to the initial deposit, Landbay also has criteria for the profitability of the property itself, and most lenders require that a BTL property generates at least 125% of its annual mortgage costs in rental income each year.
The beauty of Landbay is that it’s incredibly easy to become an investor. The minimum investment is just £100, and the online application system is simple to fill out. Thanks to Landbay’s continuing investment in digital technology they have an impressive online platform for monitoring your account’s status, and it’s possible for investors to login to their account at any time. A wide array of information is made available to lenders at the click of a button, and it’s very easy to monitor your investments on-the-go.
The UK’s real estate market is continuing to grow through the 21st century, despite the challenges it has faced. And as Landbay themselves point out, whilst the overall residential sales market took a hit during the 2008 housing crisis, demand for rental property remained unaffected. However, the UK Government’s recent decisions to clamp down on buy-to-let purchases has introduced an artificial incentive for BTL owners to sell up their properties; a combination of increased Stamp Duty, higher earning affordability requirements and reduced tax relief has begun to push BTL landlords out of the market.
This could potentially have an effect on Landbay’s services, but there’s still no shortage of borrowers looking to use their services. In fact, this may well play into the lending platform’s hands; as demand for BTL mortgages begins to subside, many major banks may decide to withdraw their buy-to-let mortgage ranges. This leaves the field wide open for Landbay to build an even greater market share, and to become an ever larger player in the BTL mortgage market.
Our mortgage brokers offer mortgage advice on a wide variety of mortgages, more detailed information about the different mortgages can be found below.